This invention relates to financial systems and, in particular, to an international data processing network which provides accessibility, speed, and flexibility in effecting payments 24 hours a day in and among multiple national currencies, such as, but not limited to, U.S. Dollars, Japanese Yen, and British Pounds Sterling. This invention is also directed to a set of mutual fund portfolios used to effect currency payment transactions to settle transactions which require such currency payments as fulfillment of an obligation. This invention is further directed to a set of mutual fund portfolios used to initiate and settle transactions which exchange value between national currencies, similar to foreign exchange.
In general, investors purchasing shares in a typical mutual fund transfer assets, such as cash, to the account of the mutual fund at a custodial institution (custodian). If the mutual fund is closed-ended, there is a limit to the number of shares which the mutual fund may issue. Conversely, if the mutual fund is open-ended, there is no limit to the number of shares which the mutual fund may issue. The mutual fund's investment advisor uses those assets transferred to it by an investor to invest in securities or other approved investments as allowed by the mutual fund's prospectus, although typically a fund will maintain a portion of its assets in cash and cash equivalents. The mutual fund's transfer agent issues to the investor the number of shares equivalent to the value of the assets transferred to the fund by said investor divided by the price of a share in the mutual fund. At this point, the investor becomes a shareholder. The price of the share is determined by the aggregate of the current market value of the mutual fund's assets and the income earned by these investments, less accrued management fees and expenses. Most mutual funds instruct their fund accountants to calculate this share price which is called a net asset value calculation, once a day. This is done by obtaining current market prices for each investment held by the fund. Investors may only purchase shares or redeem shares at a share pricing. When a shareholder redeems some number of shares, to the extent that the fund does not have cash on hand, the investment advisor sells a portion of the mutual funds assets in order to pay said shareholder the value of his shares as determined by the fund price.
There exists a multitude of mutual fund arrangements which allow shareholders to purchase and redeem open-ended shares together with limited rights of third-party purchase, also called share transfer (that is the change of ownership of a share in a portfolio from one owner of record to another), and limited rights of exchange (that is the movement of wealth from one portfolio to another by the same shareholder). Such mutual funds generally exist either as a single, or a group, of portfolio(s) denominated in one national currency, such as U.S. Dollars. For example, in a group of mutual fund portfolios, one portfolio may be invested in technology companies whereas another portfolio may be invested in energy companies. Thus, typical mutual funds earn profits and have losses based on this national currency. Furthermore, there are still other mutual funds which hold assets denominated in more than one national currency. These mutual funds earn profits and experience losses based on each currency in which its investments are denominated.
The art is replete with various concepts involving the use of mutual funds for purposes of cash money management. Additionally, these systems use the same data processing system associated with the mutual fund to provide ancillary services such as brokerage accounts, credit card services and the like. Reference is made to U.S. Pat. No. 4,346,442, which describes a cash money management scheme that is constructed around the architecture of a short term money market fund that invests free cash and uses funds in the money market for purposes of payment of charge card transactions and the like. The fund relates to only one national currency.
Reference is made to descriptions in the literature which describe alternative uses of mutual fund shares including: Gorton, Gary and George Pennacchi ("Financial Intermediation and Liquidity Creation", Journal of Finance, volume 45 number 1, March 1990) and Jacklin, Charles. J. (Working Paper, Stanford University, "Demand Equity and Deposit Insurance", April 1990).
However, mutual fund shares are not currently used through effecting share transfers for purposes of paying for goods, services, and other financial obligations such as meeting collateral requirements common for good faith deposits, securities trades, and other credit requirements. Mutual fund shares are also not used today for settling foreign exchange transactions.
The international financial community today operates using numerous national currencies and with them, distinct systems, rules, procedures and laws for currency payments for settlements of obligations within the country issuing that currency. Most rely on the country s central bank, such as the Federal Reserve in the United States, to guarantee that once a payment is made, it is irreversible. The timing of this guarantee which is called finality of payment, varies by country and by system and may be immediate, at the close of the business day, sometime the following business day, or later. This guarantee, and the execution of transactions, is dependent upon the operating hours of the central bank and the wire system. Thus, there exist within the financial community acute problems and risks when making payments in a particular country when the transfer of the underlying currency of the transaction is not supported by that country's financial system and its central bank.
Furthermore, this fragmentation of financial systems hinders the ability to change the value of the wealth held in one national currency into another national currency. The foreign exchange market is used for this purpose, but carries with it certain costs, delays in money availability and risk. In addition, there are similar problems when moving money within a national currency such as moving U.S. Dollars through the Federal Reserve Bank's Fedwire system, an internal mechanism within the Federal Reserve system to transfer currency which provides immediate finality of payment. Fedwire encompasses several Federal Reserve Bank districts, based on geographical area of the country, each with operational jurisdiction over its node of the Fedwire system. Moving money from one Federal Reserve district to another Federal Reserve district utilizing Fedwire may be subject to delay because it must pass through several nodes. Moreover, the transactions are conducted via the Federal Reserve wire which has at critical times failed. A noteworthy example of a failure(s) of the Federal Reserve wire occurred during the October 1987 stock market collapse.
This shortcoming is not limited to the United States. Other networks exist, not necessarily Government sponsored, for foreign currencies such as CHAPS for Pound Sterling and the Bank of Japan for Yen.
To date, there are no systems in effect or proposed which employ the mutual fund architecture such that issued shares can be used as currency equivalents to alleviate these problems of currency infungibility and the dependence on the central bank for payment movement and payment finality.
Within the business community there is an acute requirement for immediate currency availability to clear and settle transactions, such as in, but not limited to, the field of futures contracts. Futures trading is predicated on deposit and payment of required margins. These include an initial margin payment as a good faith deposit, set as a proportion of the value of a futures contract. Each counterparty (side) to a futures trade pays this initial margin to a clearing house through a clearing member on the day following the trade day. This initial margin is held throughout the life of the contract. The price of the contract fluctuates throughout its life.
These fluctuations in contract price give rise to a requirement for a variation margin, which is required once or twice a day by the counterparty against whom the price has moved. This "losing" party must deposit increased collateral with the clearing house to maintain the contract. This collateral is then transferred immediately to the party in whose favor the price has moved.
As an example, at the Chicago Mercantile Exchange, initial margins are called for at 6:40 a.m. CST on the day following the trade date. Variation margins are also called for at 6:40 a.m. CST and at 3:00 p.m. CST every day throughout the life of the contract, every day starting the day following the trade. Payment for initial margin requirements is generally based on deposit of interest bearing treasury securities, letters of credit or cash. Requirements for variation margin are always paid in cash. There is a time lag between the time this requirement is known until the time the payments can be made, because the United States payment systems are closed at 6:40 a.m. CST. Additionally, these payments are subject to the operating procedures of each bank involved in the process. Which may delay availability of funds and introduce additional costs. These two situations cause the execution of margin payments to occur three to four hours later than is optimal from the clearing house s perspective.
Furthermore, there is no way to pay for margin during U.S. business hours in a currency other than the U.S. Dollar. Because U.S. clearing houses prefer to be paid in the same currency as that in which the price of the futures contract is expressed, the inability to move national currencies other than the U.S. Dollar with immediate finality of payment within the U.S. business day has been a hindrance to the development of such non-dollar denominated contracts. In addition, there is no payment/wire system or network in which clearing houses, and trading firms can make U.S. Dollar payments to each other without using a bank for access to the system.
Yet another example of delays and costs associated with currency transactions is a simple foreign exchange transaction, such as from U.S. Dollars to Japanese Yen. An institution typically wishing to make such an exchange currently requires the intervention of at least two banks, a bank in the United States to initiate the transfer in dollars and a receiving bank in Japan to receive and transfer the converted funds to the Yen account. Multi-day delays for fund availability are common even in the case of wire transfers. The requirement that multiple banks be used increases fees.
Furthermore, since the two sides of the transaction are not effected within the same financial system, there is an opportunity for loss, whereby the Yen transaction is accomplished but the companion U.S. Dollar transaction is not. Thus, there exists a need within the financial community for a vehicle by which currency transactions and exchanges can be made on a timely, reliable and synchronous basis.
In the evolving global economy, a variety of problems continue to exist associated with the use of multiple national currencies. These problems can range from the extreme of currencies which are not convertible, such as the ruble in the U.S.S.R., to merely issues of inconvenience.